The Supreme Court has recently ruled that when an Indian entity’s establishment operates in Oman and holds a ‘Permanent Establishment’ status under the Double Taxation Avoidance Agreement (DTAA), any dividend income received by the Indian entity from this establishment will not be subject to taxation under Indian tax laws.
In a significant observation, a bench consisting of Justice B.V. Nagarathna and Justice Prashant Kumar Mishra noted, “It is evident that the assessee’s establishment in Oman has been consistently treated as a Permanent Establishment from the very beginning up to the year 2011. There is no valid reason why the assessee’s establishment in Oman should suddenly cease to be recognized as a Permanent Establishment, especially when it had enjoyed tax exemption for approximately 10 years based on the provisions found in Article 25 in conjunction with Article 8 of Omani Tax Laws.”
The assessee, M/s Krishak Bharti Cooperative Ltd. is a registered multi-state cooperative society under the administrative control of the Government of India. The Assessee entered into a joint venture (JV) with Oman Oil Company to establish the Oman Fertilizer Company SAOC, a registered company in Oman manufacturing fertilizers for purchase by the Central Government.
Article 8 of Omani Tax Laws specifies exceptions to Article 8, stating that tax will not apply to (i) dividends received by the company against equity shares, portions, or stocks in the capital of any other company, or (ii) profits or gains realized by the company from the sale of securities listed in the Muscat Securities Market or their disposal.
Under Omani law, dividends distributed by all companies, including those exempt from tax, are also exempt from income tax for the recipients. Originally, such income would have been taxable under Omani law, but an exemption was introduced.
In 2000, the JV sought clarification from Oman regarding Article 8. Oman’s response affirmed that dividend income, including that of tax-exempt companies, would be exempt from income tax for the recipients. Oman introduced this exemption to attract investments and promote development within the country.
Furthermore, Article 25(2) of the Double Taxation Avoidance Agreement (DTAA) between India and Oman states that if a resident of India earns income that may be taxed in Oman according to the agreement, India must allow a deduction equal to the income tax paid in Oman, whether directly or by deduction.
The Assessee holds Permanent Establishment (PE) status in Oman under Article 25 of the DTAA. The branch office maintains its own financial records and complies with Omani income tax laws.
The assessment for the relevant year was conducted under Section 143(3) of the Income Tax Act, 1961. The Income Tax Department’s Assessing Officer allowed a tax credit for the dividend income received by the Assessee from the JV. However, the same income was also subject to tax under Indian tax laws. The Omani tax laws had granted an exemption for this dividend income since 2000.
Nonetheless, the Principal Commissioner of Income Tax (PCIT) took a different stance, arguing that Article 25 did not apply because dividend income in Oman was subject to tax. As no tax had been paid in Oman, the Assessee was not exempt from paying tax in India on this income.
On appeal, the Income Tax Appellate Tribunal (ITAT) had set aside the order of the PCIT. Subsequently, the Delhi High Court upheld the decision of the tribunal in appeal, affirming the Assessee’s entitlement to claim tax credit under the India-Oman DTAA.
The PCIT appealed against this decision to the Supreme Court.
Arijit Prasad, counsel for the revenue submitted that Article 11(4) would only apply in a case where the Permanent Establishment (PE) of the assessee was carrying on business in Oman, whereas, in the case in hand, the PE is only doing preparatory and auxiliary work and is not having any tangible expenses.
He thus argued that the dividend income of the assessee is not related to its PE. It is also argued that the exemption letter dated 11.12.2000 issued by the Sultanate of Oman, Ministry of Finance under the signatures of Secretary General for Taxation, has no statutory force as per Omani Tax Laws, therefore, the same cannot be relied upon to claim exemption.
On the other hand, Arvind P. Dattar, senior counsel for the assessee contended that the provisions of DTAA fully exempt the assessee from payment of tax on dividend in Oman which, in turn, would exempt the assessee from taxation in India.
Assessing whether the dividend income earned by the Assessee, even though exempt under Omani Tax Laws, would entitle the Assessee to benefits under the DTAA, the Supreme Court two-judge bench ruled in favour of the assessee.
The Court opined that because the Assessee had established a Permanent Establishment in Oman as part of its investment in the project, and the JV was registered as a separate company under Omani law, this action contributed to promoting economic development in Oman, aligning with the objectives of Article 8. The Clarificatory Letter from the Sultanate of Oman had explicitly stated that tax would be payable on dividend income earned by the Permanent Establishment of Indian Investors, but for the tax exemption provided under Article 8.
Due to Article 25, the Assessee was entitled to the same tax treatment in India as in Oman.
The Court concluded, “assessee’s establishment in Oman has been treated as PE from the very inception up to the year 2011. There is no reason as to why all of a sudden, the assessee’s establishment in Oman would not be treated as PE when for about 10 years it was so treated, and tax exemption was granted basing upon the provisions contained in Article 25 read with Article 8 of the Omani Tax Laws.”
The Court upheld the Assessing Officer’s decision to allow the tax credit for the dividend income received by the Assessee.
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